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COLUMN-Ukraine may see Europe look West, Russia east for energy: Russell
September 4, 2014 / 6:01 AM / in 3 years

COLUMN-Ukraine may see Europe look West, Russia east for energy: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, Sept 4 (Reuters) - Here’s one for rabid conspiracy theorists: U.S. proponents of liquefied natural gas (LNG) projects joined with coal miners and Chinese gas buyers to pay Vladimir Putin to stir up rebellion in Ukraine.

This is of course a ridiculous notion, but it does underscore that the main beneficiaries of the current crisis are likely to be those that can take advantage of the seismic shift in global energy flows that may be the lasting legacy of the conflict in Ukraine.

While the immediate focus is on efforts to bring peace to Ukraine, the longer-term impact is likely to see Europe seek alternatives to Russian natural gas, and Russia seeking other markets for its mainstay energy exports.

Russian President Putin has outlined plans for a ceasefire between pro-Russian rebels and Ukrainian forces in the disputed east of the country, which were dismissed by the authorities in Kiev.

While the conflict has yet to have an impact on natural gas flows from Russia, through Ukraine, to Europe, the longer it goes on, the greater the risks become.

The European Union (EU) gets about a third of its natural gas supplies from Russia, with a significant amount going through pipelines across Ukraine.

So far, Europeans have reacted to the crisis by boosting storage levels, with tanks across the EU’s 28 nations at 71 percent capacity, up from 34 percent at this time last year.

While this may mitigate immediate shortages this winter, the problem remains for many European countries that their energy security is largely in the hands of Russia, a country they increasingly view as a threat to regional stability.

In addition, European nations are exposed to unstable minor nations that act as conduits for Russian natural gas or oil flows.

The prudent thing to do is to diversify the energy supply sources, especially for countries most reliant on Russian imports, such as Greece and other nations in southeast Europe.

Greece currently has one small LNG import terminal, while Croatia is building a 10 million tonne per annum facility.

Poland is also building a regasification terminal, and other such plants are under construction, or planned, for Finland, Lithuania, France and Spain.

It may be prudent for the natural gas importing nations of Europe to consider building more LNG receiving terminals, or encouraging the development of intra-Europe pipelines that can supply them in case of interruptions from Russia.


If this concern over Russia translates into action, then the planned and proposed U.S. LNG exporters will be the major beneficiaries.

Some 48 million tonnes per annum of LNG capacity has been approved by the U.S. authorities, and the first project, Sabine Pass, is due to start exports next year.

There is a potential for at least 160 million tonnes per annum more of LNG in the United States, although the chances of all this being built are extremely remote.

This is largely because the LNG exports, as initially envisaged, were targeted at Asian demand, led by China.

But as is often the case in commodity markets, as soon as a supply gap opens up, it’s rapidly closed, and then the market gets over-supplied as project developers rush in with apparently little thought as to what their competitors are doing.

However, the possibility of higher LNG imports into Europe may entice some U.S. developers, given they will be more competitive than other potential suppliers to the Old World because of lower transport costs and cheaper shale gas as a feedstock.

U.S. coal miners may also benefit from Europe’s renewed interest in the fuel, as again, they will be able to supply it more cost-effectively than many other major exporters.

Of course, Russia’s major energy companies, such as Gazprom , are unlikely to want to surrender market share in Europe, hence their efforts to convince buyers that despite the Ukraine conflict, Russia remains a reliable supplier.

But it would also be logical for Russian companies to continue to look east, toward China and perhaps the rapidly growing markets of Southeast Asia, for new customers.

The multi-billion dollar deal between Russia and China to build a new pipeline to supply 38 billion cubic metres of natural gas a year is a case in point.

Putin also said on Sept. 1 that he welcomes the idea of Chinese investors joining the Vankor oil field, the second-biggest project of Russia’s Rosneft .

Chinese Vice Premier Zhang Gaoli, on a visit to Moscow on Sept. 1, expressed hope that oil and gas giants from China and Russia will further expand bilateral energy cooperation.

Once trends start, they tend to gather a momentum of their own, and it appears that the Ukraine conflict is a further spur to move Europe further away from Russia, and Russia closer to China and the far east. (Editing by Himani Sarkar)

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